Declining Stock and Decent Financials: Is The Market Wrong About IVU Traffic Technologies AG (ETR:IVU)?
In This Article:
With its stock down 3.8% over the past three months, it is easy to disregard IVU Traffic Technologies (ETR:IVU). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to IVU Traffic Technologies' ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for IVU Traffic Technologies
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for IVU Traffic Technologies is:
15% = €11m ÷ €75m (Based on the trailing twelve months to June 2024).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.15 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
IVU Traffic Technologies' Earnings Growth And 15% ROE
To start with, IVU Traffic Technologies' ROE looks acceptable. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. Yet, IVU Traffic Technologies has posted measly growth of 4.3% over the past five years. That's a bit unexpected from a company which has such a high rate of return. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.
As a next step, we compared IVU Traffic Technologies' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 11% in the same period.
